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Monday, July 1, 2013

So Much Talk About Taxes!

It may not be a new trend, but every time I hear of a high profile athlete signing with a new team I always hear about taxes. It makes sense that we only hear about the high profile players because they have the most to lose in taxes by signing big value contracts.

The latest example is Dwight Howard. Howard is currently a free agent and exploring different teams that he could play for next season. The only thing that is a near certainty for Dwight is that he will receive a max contract or something close.

Currently Dwight is being rumored with many teams across the league. Two of particular interest for tax reasons are the Dallas Mavericks and the Houston Rockets. Both of these Texas state teams have an added advantage when signing free agents because they operate in a state without income tax via the state. Florida professional sport teams also enjoy this added incentives to acquire free agents.

If Dwight resigns with the Lakers, he might be subjected to the 13.3% state income tax in California for individuals earning more than $1 million. The reason why Dwight would not automatically be subjected to this tax is because of his residency. State income tax is assessed by where someone is considered to have primary residency. Dwight has a home in Florida that he could attempt to use as his primary residency.

The tax factor for Dwight Howard is significant because if he has to declare residency in California, he could be accepting a lower value contract with the Lakers. Although the contract with the Lakers would be a max deal, a four year deal from a Texas team could result in higher net dollars.

Final Thought
It will be tough for Dwight to declare residency in Florida because the state of California has more aggressive policies in tracking information related to taxes. Dwight would also be an easy target because of the high gross value he would receive per season. I would be curious to know how big of a factor taxes play in Dwight's decision. Although I do not think taxes alone will decide where Howard plays next season, it is understandable that taxes will weigh into the decision.

For teams who have the benefit of playing in a state with low or no state income tax, they should take advantage of it. These teams have the ability to add an incentive that another team could not match no matter what they do. Taxes are one of the rare things that teams do not have the ability to control.